No single factor has consistently outperformed over time. For long term investors a multi-factor strategy provides the potential to achieve higher returns than traditional market-capitalisation indices.
Factor based investing – or smart beta – generally refers to a category of rules-based approaches to investing. In our article, we explore the concept of factor based investing and how can it benefit your portfolio.
Over the last five years, five different factors have exhibited the strongest performance. Growth topped the list in 2020, Quality in 2019, Minimum Volatility in 2018, Momentum in 2017, and Value in 2016. This demonstrates the historical volatility of single factor performance.
No single factor has consistently outperformed over time, as illustrated in the table below.
Because different factors may perform well at different times, investors may want to consider investments that diversify across multiple factor strategies. Combining, for example, volatility, value and quality factors may offset the cyclicality of single-factor performance, and achieve smoother returns over different business cycles.
Harnessing the drivers of equity risk and return or factors, the SPDR® MSCI World Quality Mix Fund (Ticker: QMIX) seeks to closely track the MSCI World Factor Mix A-Series Index, which is an equally weighted combination of three factor strategies —Value, Minimum Volatility and Quality. This means the fund holds a basket of stocks that are “low risk” (minimum volatility), “inexpensive” (low price-to-fundamentals ratio – where fundamentals are book value, sales or cash flows), and “high-quality” (profitable, stable, and relatively conservatively leveraged).
The combination of these three factors, provides investors with a portfolio that aims to capture gains in improving markets while at the same time mitigate risk during periods of market volatility, at a lower cost than active management.
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Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
A Smart Beta strategy does not seek to replicate the performance of a specified cap-weighted index and as such may underperform such an index. The factors to which a Smart Beta strategy seeks to deliver exposure may themselves undergo cyclical performance. As such, a Smart Beta strategy may underperform the market or other Smart Beta strategies exposed to similar or other targeted factors.
A “low volatility” style of investing can exhibit relative low volatility and excess returns compared to the Index over the long term; both portfolio investments and returns may differ from those of the Index. The fund may not experience lower volatility or provide returns in excess of the Index and may provide lower returns in periods of a rapidly rising market.
A "quality" style of investing emphasizes companies with high returns, stable earnings, and low financial leverage. This style of investing is subject to the risk that the past performance of these companies does not continue or that the returns on "quality" equity securities are less than returns on other styles of investing or the overall stock market.
A “value” style of investing that emphasizes undervalued companies with characteristics for improved valuations, which may never improve and may actually have lower returns than other styles of investing or the overall stock market.
Companies with large market capitalisations go in and out of favor based on market and economic conditions. Larger companies tend to be less volatile than companies with smaller market capitalisations. In exchange for this potentially lower risk, the value of the security may not rise as much as companies with smaller market capitalisations.
Investments in mid-sized companies may involve greater risks than in those of larger, better known companies, but may be less volatile than investments in smaller companies.
Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
Risks associated with equity investing include stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions.
Diversification does not ensure a profit or guarantee against loss.
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